A What is the Consumer Price Index and how is it measured So

A) What is the Consumer Price Index and how is it measured?

Solution

Consumer price index (CPI) measures the change in cost of living over a period. Typically, inflation is measured by percentage change in CPI over two periods.

To compute CPI, the cost of purchasing a fixed basket of goods and services consumed by a typical household is calculated using prices of a designated base year. Next, the cost of purchasing that same basket is computed using prices of the year in question (current year). CPI is then calculated using following relationship:

CPI in year N = (Cost of market basket in year N / Cost of market basket in base year) x 100